News of Note

CRA states that, in the context of TCP characterization, upstream and downstream loans within a wholly-owned corporate group generally are to be treated differently

In the context of providing guidelines on whether shares of non-resident corporations (“NRCos”), with various direct or indirect wholly-owned Canadian operating subsidiaries holding to some extent Canadian real property or other potentially tainting properties, are taxable Canadian property, the Rulings Directorate’s established position is that (i) the gross asset (rather than net asset) value method should be used to determine whether more than 50% of the fair market value of the NRCo shares was derived directly or indirectly from the Canadian real property etc., and (ii) that for these purposes the proportionate value approach should be used to determine the proportion of the FMVs of the shares of the Opcos that derived from the Canadian real property etc.

For these purposes, a downstream loan within the group is effectively ignored and is treated instead as increasing the FMV of the shares of the particular wholly-owned subsidiary. However, recognizing an upstream loan would result in double counting because the assets acquired by the parent out of the proceeds thereof would already be counted for purposes of the tests – so that the loan’s value decreases the relevant FMV of the shares of the particular wholly-owned subsidiary. The treatment of a loan made to a sister depends on a range of factors but, generally, will be treated similarly to a downstream loan if that is reflective of the ultimate use of the funds, and otherwise generally will be recognized (if it is not part of a back-to-back loan made by the parent to a subsidiary).

Neal Armstrong. Summary of 1 May 2017 Internal T.I. 2015-0624511I7 under s. 248(1) – taxable Canadian property para. (d).

CRA posts its draft Memorandum on GST/HST voluntary disclosures to its new subsite

The new draft GST/HST Memorandum on the Voluntary Disclosure Program, which would become effective after 2017, is similar to the draft Income Tax Circular which was released at the same time. For example, where there has been “major non-compliance” (determined in accordance with essentially the same vague guidelines) no interest or penalty relief will be provided other than of the gross negligence penalty. One difference is that CRA draws a distinction between “Track 1” transactions which satisfy the CRA wash-trading guidelines (generally, where a registrant with a good history failed for reasons other than negligence to charge GST/HST to a registrant who would have been entitled to a full input tax credit therefor), which are entitled to full interest relief, and other “Track 2” situations (other than of “major non-compliance” – which are “Track 3”), where only 50% interest relief is provided.

A second difference is that in an income tax voluntary disclosure, the taxpayer is required to go back for all the years in which there was deficient disclosure, whereas under a Track 1 and Track 2 GST/HST disclosure, there is only a requirement to go back 4 or 6 years, respectively.

The old CRA website (cra-arc.gc.ca) is being migrated to a subsite on the federal government website (canada.ca). Both the draft income tax circular and the draft GST/HST memorandum were posted to the latter rather than the former.

Neal Armstrong. Summary of June 2017 Draft GST/HST Memorandum 16.5 – Voluntary Disclosures Program under ETA – s. 281.1(2).

CRA states that the residence of a dual-resident s. 94(3) trust generally will not be ceded to the IRS, but double taxation relief should be provided

Where a U.S. estate is deemed to be a Canadian-resident trust under s. 94(3) (or it has Canadian central management and control), Art. IV(4) of the Convention contemplates that the competent authorities “shall…endeavor to settle the [dual residence] question and to determine the mode of application of the Convention to such person.” CRA considers it quite unlikely that the Canadian competent authority would agree under Art. IV(4) that the trust was not resident in Canada. However, CRA indicated that the Canadian competent authority will accept requests from trusts that are deemed resident in Canada seeking relief from double tax - which could be provided unilaterally or following negotiations with the U.S.

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.3 under Treaties – Art. 4.

CRA indicates in its draft VDP Circular that it intends to unlawfully fetter its discretion

In a draft revised version of its Information Circular on the Voluntary Disclosures Program (to become effective on January 1, 2018), CRA states that it will not provide any penalty relief other than for the gross negligence penalty, and no interest relief, where the taxpayer has disclosed major non-compliance. CRA will consider the occurrence of one or more of various listed markers to represent major non-compliance, including: large dollar amounts; multiple years of non-compliance; or a sophisticated taxpayer.

CRA has a statutory obligation to exercise its discretion under s. 220(3.1) to determine whether or not to grant interest and penalty relief having regard to the circumstances of each taxpayer, rather than being permitted to pre-announce narrow criteria for the provision of relief which it then applies rigidly (see TD Bank and Stemijon). If the announced criteria for refusing to provide relief (other than for the gross negligence penalty) are not rigid, that is only because they are too capricious and vague to qualify as such. That presumably will not improve the CRA legal position in seeking to follow the approach in the draft Circular.

Neal Armstrong. Summary of June 2017 Draft Information Circular - IC00-1R6 - Voluntary Disclosures Program under s. 220(3.1).

CRA considers using a corporate beneficiary to defer realization of s. 104(4) gain is abusive even if the gain will be realized in the lifetime of the existing beneficiaries

At the 2016 CTF Roundtable, Q.1, CRA stated that it generally would consider it to be an abusive circumvention of the rule for the realization by a trust of gains on its 21st anniversary (and of the related anti-avoidance rule in s. 104(5.8)) to distribute the property of a discretionary trust to a corporate beneficiary who was owned by a new discretionary trust. At that time, CRA indicated that it was still considering whether it would also be objectionable from a GAAR perspective if under the structure the realization of the accrued gains on the trust property would not be deferred beyond the lifetime of those who were beneficiaries at the time of the 21st anniversary of old Trust. Thus, the the realization event, i.e. the death of the individual beneficiary, would be consistent with that achieved by a deferred rollover of property to a Canadian resident individual beneficiary pursuant to s. 107(2) (although, in fact, the trust property would continue to be held indirectly in a discretionary trust.)

CRA has now confirmed that it would consider this more limited type of deferral to also represent an abuse of s. 104(5.8) on which it would not provide a GAAR ruling.

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.2 under s. 104(5.8).

Income Tax Severed Letters 14 June 2017

This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA is not yet prepared to provide guidelines on when it will reduce specified corporate income based on its view of reasonableness

The determination of what otherwise would be a corporation’s “specified corporate income” for small business deduction purposes is deemed by para. (b) of the s. 125(7) definition to be such lesser “amount that the Minister determines to be reasonable in the circumstances.” When invited to articulate when it might apply para. (b), CRA stated:

What is reasonable or not in the circumstances remains a question of fact… . The CRA will only be able to provide specific examples once it has had the opportunity to fully consider specific fact situations involving a taxpayer’s computation of income otherwise determined under subpara. (a)(i) of the definition of “specified corporate income.”

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.1 under s. 125(7) - specified corporate income – (b).

Six further full-text translations of CRA technical interpretations are available

Full-text translations of six French technical interpretations that were released last week and between January 28, 2015 and January 21, 2015, are listed and briefly described in the table below.

These (and the other translations covering the last 28 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2017-06-07 15 May 2017 External T.I. 2015-0580461E5 F - Life insurance policy held in an RCA trust Income Tax Act - Section 207.5 - Subsection 207.5(1) - RCA Strip holding of life insurance policy could entail RCA strip
Income Tax Act - Section 207.5 - Subsection 207.5(3) s. 207.7(2) refund might be generated where an RCA trust distributes a life insurance policy to its employee beneficiary
21 November 2016 Internal T.I. 2016-0641961I7 F - DSU Plan Income Tax Regulations - Regulation 6801 - Paragraph 6801(d) - Subparagraph 6801(1)(d)(i) potential change-of-control redemption trigger (and Code s. 409A triggers) were offside
Income Tax Act - Section 6 - Subsection 6(11) recognition in income of full value of deferred units issued under offside plan
2015-01-28 13 November 2014 External T.I. 2014-0523581E5 F - Prestations de RPA - Exonération Other Legislation/Constitution - Federal - Indian Act - Section 87 taxable portion of RPP benefits of reserve Indian determined based on portion of contributions paid out of taxable earnings
13 November 2014 External T.I. 2014-0535041E5 F - Bien de remplacement – Location d'immeubles Income Tax Act - Section 44 - Subsection 44(5) - Paragraph 44(5)(a.1) rental property use before and after satisfies test
2015-01-21 3 September 2014 Internal T.I. 2014-0533361I7 F - Ligne directrice 4 Other Legislation/Constitution - Federal - Indian Act - Section 87 Guideline 4 not met where Indian organization had non-Indian clients
5 June 2014 Internal T.I. 2014-0532281I7 F - Chambre des communes-donataire reconnu 149.1(1) Income Tax Act - Section 149.1 - Subsection 149.1(1) - Qualified Donee - Paragraph (a) - Sujbparagraph (a)(iii) Parliament does not perform a function of government

St-Pierre – Tax Court of Canada finds that the judicial nullification rather than rectification of a premature capital dividend declaration gave rise to a s. 15(2) income inclusion

A private corporation that sold eligible capital property in 2008 declared a capital dividend in the year in an amount which included the untaxed portion of this sale receipt. This was a mistake, as the addition to the capital dividend account for this amount does not occur until the beginning of the following year. When CRA discovered this mistake a number of years later, it indicated that it would not assess the corporation for Part III tax provided that the mistake was rectified through an order of the Quebec Superior Court.

What CRA likely had in mind was that the court order would simply change the effective dates of the dividend payable dates. As it happened, only a small portion of the dividend made payable in 2008 was actually paid in 2008, so that the CDA addition from the sale was not needed to cover that dividend payment. Accordingly, all that was necessary to fix the problem was to get the court order to declare the payable date for most of the dividend to be on or after January 1, 2009.

What the corporation instead sought and obtained was a court order dated January 6, 2014 that retroactively annulled the dividend and ordered the individual shareholder to repay the dividend, which he then did, and with a fresh capital dividend then being declared and paid. The corporation’s counsel sought this nullification order notwithstanding that CRA, on being apprised of this nullification plan, had a number of months previously assessed the individual under s. 15(2).

Favreau J upheld the s. 15(2) assessment. Although he did not consider that the court-declared obligation of the individual to effect restitution to the corporation of the dividend amounts had retroactive effect so as to give rise to indebtedness at the time of the s. 15(2) assessment, he considered that the dividend payments gave rise to indebtedness of the individual to the corporation under the unjust enrichment principle.

Neal Armstrong Summaries of St-Pierre v. The Queen, 2017 CCI 69 under s. 15(2) and General Concepts - Estoppel.

Granofsky – Federal Court of Appeal confirms that a taxpayer’s counsel can consent in writing to reassessment of the taxpayer

S. 169(3) provides that the Minister may at any time reassess, with the consent in writing of “the taxpayer.” D’Auray J in the Tax Court found that this requirement can be satisfied through a signature of the taxpayer’s counsel acting within the scope of her mandate (and went on to find that, in the case before her, counsel had the mandate). Scott JA in the Court of Appeal agreed with this finding, stating that "the counsel of record…was entitled to provide, for the purpose of executing the [settlement] Agreement, the ‘consent in writing’ referred to in subsection 169(3)."

Neal Armstrong. Summary of Granosky v. The Queen, 2016 TCC 181, aff’d 2017 FCA 119 under s. 169(3).

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